Bailouts and Bazookas

I know it's hard to believe but Treasury Secretary Hank Paulson is a Republican.
It was especially hard to keep that in mind during his appearances on the Sunday
talk shows this weekend. His stated mission was to garner support for the bailout
plans of Fannie Mae (NYSE: FNM)
and Freddie Mac (NYSE: FRE).
I hoped that he, being of the party that supports free markets, would have
instead asked why the government is involved in the real estate market in the
first place. I preferred that Treasury would have repudiated any further association
with the GSEs and cease to allow them to raise new capital with the backing
of the government.

Incredibly, the erstwhile Wall Street executive made the case for allowing
Treasury the unlimited power to purchase the GSE's debt and Equity.
His reasoning was, if the bad guys know you have a bazooka on your hip you
are unlikely to be called into a gunfight.

The bad news for Americans is that his bazooka will be used to destroy the
U.S. constitution. Article one section ten of the document, which he definitely
doesn't comprehend, says that money should consist of only gold and silver.
Our founding fathers wanted to place a yoke upon the states and those in power
in order to prevent them from usurping the purchasing power of the Republic's
currency. How wise they were. They knew that once in control of government,
those in power would do anything they could to maintain it. Even those who
espouse free market capitalism will try to abrogate the system for personal
gain. And now these Republicans want to extend the powers of the Fed and Treasury,
giving them a blank check to purchase even the equity portion of
these failing companies. Be it stimulus checks, GSE bailouts, FDIC reimbursements
or artificially low interest rates the purpose is always the same, to buy votes.

It is important to keep in mind that in whatever form they appear, all government
bailouts consist of solely the ability to print money. How much in the case
of Fannie and Freddie you ask? The Congressional Budget Office estimates that
the bailout could cost about $25 billion. If that is the estimate from the
government, imagine how enormous the actual number may be? The market understands
this and that is why the U.S. dollar did not appreciate during this past week's
market rally. There can be no real market appreciation unless the Fed and Administration
begin to take seriously their charge to provide a stable currency. Until then,
we will have a stagflation nation and it will require investors to continue
to own commodities as an alternate currency and real store of wealth.

With more than 16 years of industry experience, Michael Pento acts as chief
economist for Delta Global Advisors and is a contributing writer for GreenFaucet.com.
He is a well-established specialist in the Austrian School of economic theory
and a regular guest on CNBC and other national media outlets. Mr. Pento has
worked on the floor of the N.Y.S.E. as well as serving as vice president of
investments for GunnAllen Financial immediately prior to joining Delta Global.